Appetite for investment affected as manufacturing growth in activity softens

Growth in manufacturing activity softened in the three months to October, and while sentiment about export prospects continued to rise, it did so at a slower pace.

Growth in output, domestic orders and export orders also eased, though remained above their respective long-run averages.

This seems to have affected appetites for investment by manufacturers for the year ahead, with spending plans for buildings at their lowest since July 2009. Expectations for spending on new equipment also weakened. Plans for investment in training and innovation remained much firmer by comparison.

Concerns over labour shortages also edged up from already high levels, with the number of respondents citing them as a limitation to investment plans at the highest since October 2013. Numbers employed continued to rise strongly over the past three months, and hiring intentions for the quarter ahead remain above the long-run average.

Unit costs growth picked up compared with the previous quarter, running ahead of output price inflation, indicating an ongoing squeeze on manufacturers’ margins.

Rain Newton-Smith, CBI Chief Economist, says: “Growth in output and orders are still above historical norms, and it’s encouraging that plans for spending on innovation and training are holding their own. But we’ve seen a general softening in manufacturing activity over the past three months, with the outlook for investment becoming more subdued.

“To boost investment growth, Government should use the Budget to provide a fillip for factories through business rate reforms, including exempting new plant and machinery from rates altogether, and switching to the more recognized CPI inflation measure rather RPI when calculating upratings.”

Key findings:

  • 12% of firms said they were more optimistic about the general business situation than three months ago and 24% were less optimistic, giving a balance of -11% (down from +5% in the three months to July). Optimism about export prospects for the year ahead grew (+7%), albeit at a slightly slower pace than the previous quarter (+13%)
  • 26% of firms said the volume of output over the past three months was up and 12% said it was down, giving a balance of +14%, above the long-run average (+2%)
  • 29% of businesses reported an increase in total orders, and 23% a decrease, giving a balance of +6%. Both domestic orders (+5%) and export orders (+12%) grew at a slower pace, albeit remaining above their long-run averages (-4% and -6% respectively)
  • 31% of manufacturers said employee numbers were up, and 15% said they were down, giving a rounded balance of +16%, broadly similar to the previous quarter (+18%)
  • Average unit costs grew quicker (+32%) than the previous quarter (+20%). Growth in average domestic prices (+19%) was broadly unchanged, with export price inflation (+16%) remaining above average (-8%)

Key findings – looking ahead:

  • Expectations for total new orders growth (+20%) are the most upbeat since April 2015 (+22%), with growth in orders expected to pick up both domestically (+9%) and overseas (+22%)
  • Output growth is expected to pick up slightly (+19%)
  • Unit costs growth is expected to remain strong next quarter (+26%), and is expected to continue running ahead of domestic output price inflation (+18%)
  • Investment intentions for buildings (-30%) are the lowest since July 2009 (-43).